[Federal Register Volume 79, Number 84 (Thursday, May 1, 2014)]
[Rules and Regulations]
[Pages 24528-24541]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-09367]
[[Page 24528]]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF TREASURY
Office of the Comptroller of the Currency
12 CFR Part 6
[Docket ID OCC-2013-0008]
RIN 1557-AD69
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 217
[Regulation H and Q; Docket No. R-1460]
RIN 7100-AD 99
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 324
RIN 3064-AE01
Regulatory Capital Rules: Regulatory Capital, Enhanced
Supplementary Leverage Ratio Standards for Certain Bank Holding
Companies and Their Subsidiary Insured Depository Institutions
AGENCIES: Office of the Comptroller of the Currency, Treasury; the
Board of Governors of the Federal Reserve System; and the Federal
Deposit Insurance Corporation.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board
of Governors of the Federal Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC) (collectively, the agencies) are
adopting a final rule that strengthens the agencies' supplementary
leverage ratio standards for large, interconnected U.S. banking
organizations (the final rule). The final rule applies to any U.S. top-
tier bank holding company (BHC) with more than $700 billion in total
consolidated assets or more than $10 trillion in assets under custody
(covered BHC) and any insured depository institution (IDI) subsidiary
of these BHCs (together, covered organizations). In the revised
regulatory capital rule adopted by the agencies in July 2013 (2013
revised capital rule), the agencies established a minimum supplementary
leverage ratio of 3 percent, consistent with the minimum leverage ratio
adopted by the Basel Committee on Banking Supervision (BCBS), for
banking organizations subject to the agencies' advanced approaches
risk-based capital rules. The final rule establishes enhanced
supplementary leverage ratio standards for covered BHCs and their
subsidiary IDIs. Under the final rule, an IDI that is a subsidiary of a
covered BHC must maintain a supplementary leverage ratio of at least 6
percent to be well capitalized under the agencies' prompt corrective
action (PCA) framework. The Board also is adopting in the final rule a
supplementary leverage ratio buffer (leverage buffer) for covered BHCs
of 2 percent above the minimum supplementary leverage ratio requirement
of 3 percent. The leverage buffer functions like the capital
conservation buffer for the risk-based capital ratios in the 2013
revised capital rule. A covered BHC that maintains a leverage buffer of
tier 1 capital in an amount greater than 2 percent of its total
leverage exposure is not subject to limitations on distributions and
discretionary bonus payments under the final rule.
Elsewhere in today's Federal Register, the agencies are proposing
changes to the 2013 revised capital rule's supplementary leverage
ratio, including changes to the definition of total leverage exposure,
which would apply to all advanced approaches banking organizations and
thus, if adopted, would affect banking organizations subject to this
final rule.
DATES: The final rule is effective January 1, 2018.
FOR FURTHER INFORMATION CONTACT:
OCC: Roger Tufts, Senior Economic Advisor, (202) 649-6981; Nicole
Billick, Risk Expert, (202) 649-7932, Capital Policy; or Carl Kaminski,
Counsel; or Henry Barkhausen, Attorney, Legislative and Regulatory
Activities Division, (202) 649-5490, Office of the Comptroller of the
Currency, 400 7th Street SW., Washington, DC 20219.
Board: Constance M. Horsley, Assistant Director, (202) 452-5239;
Juan C. Climent, Senior Supervisory Financial Analyst, (202) 872-7526;
or Sviatlana Phelan, Senior Financial Analyst, (202) 912-4306, Capital
and Regulatory Policy, Division of Banking Supervision and Regulation;
or Benjamin McDonough, Senior Counsel, (202) 452-2036; April C. Snyder,
Senior Counsel, (202) 452-3099; or Mark C. Buresh, Attorney, (202) 452-
5270, Legal Division, Board of Governors of the Federal Reserve System,
20th and C Streets NW., Washington, DC 20551. For the hearing impaired
only, Telecommunication Device for the Deaf (TDD), (202) 263-4869.
FDIC: George French, Deputy Director, gfrench@fdic.gov; Bobby R.
Bean, Associate Director, bbean@fdic.gov; Ryan Billingsley, Chief,
Capital Policy Section, rbillingsley@fdic.gov; Karl Reitz, Chief,
Capital Markets Strategies Section, kreitz@fdic.gov; Capital Markets
Branch, Division of Risk Management Supervision,
regulatorycapital@fdic.gov or (202) 898-6888; or Mark Handzlik,
Counsel, mhandzlik@fdic.gov; Michael Phillips, Counsel,
mphillips@fdic.gov; Rachel Ackmann, Senior Attorney,
rackmann@fddic.gov; Supervision Branch, Legal Division, Federal Deposit
Insurance Corporation, 550 17th Street NW., Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
I. Background
On August 20, 2013, the agencies published in the Federal Register,
for public comment, a joint notice of proposed rulemaking (the 2013
NPR) to strengthen the agencies' supplementary leverage ratio standards
for large, interconnected U.S. banking organizations.\1\ As noted in
the 2013 NPR, the recent financial crisis showed that some financial
companies had grown so large, leveraged, and interconnected that their
failure could pose a threat to overall financial stability. The sudden
collapses or near-collapses of major financial companies were among the
most destabilizing events of the crisis. As a result of the imprudent
risk taking of major financial companies and the severe consequences to
the financial system and the economy associated with the disorderly
failure of these companies, the U.S. government (and many foreign
governments in their home countries) intervened on an unprecedented
scale to reduce the impact of, or prevent, the failure of these
companies and the attendant consequences for the broader financial
system.
---------------------------------------------------------------------------
\1\ 78 FR 51101 (August 20, 2013).
---------------------------------------------------------------------------
A perception persists in the markets that some companies remain
``too big to fail,'' posing an ongoing threat to the financial system.
First, the perception that certain companies are ``too big to fail''
reduces the incentives of shareholders, creditors and counterparties of
these companies to discipline excessive risk-taking by the companies.
Second, it produces competitive distortions because those companies can
often fund themselves at a lower cost than other companies. This
distortion is unfair to smaller companies, damaging to fair
competition, and may artificially encourage further consolidation and
concentration in the financial system.
An important objective of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (Dodd-Frank Act) is to mitigate the
threat to financial stability posed by systemically-
[[Page 24529]]
important financial companies.\2\ The agencies have sought to address
this concern through enhanced supervisory programs, including
heightened supervisory expectations for large, complex institutions and
stress testing requirements. In addition, the Dodd-Frank Act mandates
the implementation of a multi-pronged approach to address this concern:
A new orderly liquidation authority for financial companies (other than
banks and insurance companies); the establishment of the Financial
Stability Oversight Council, empowered with the authority to designate
nonbank financial companies for Board supervision (designated nonbank
financial companies); stronger regulation of large BHCs and designated
nonbank financial companies through enhanced prudential standards; and
enhanced regulation of over-the-counter (OTC) derivatives, other core
financial markets and financial market utilities.
---------------------------------------------------------------------------
\2\ See, e.g., Public Law 111-203, 124 Stat. 1376, 1394, 1571,
1803 (2010).
---------------------------------------------------------------------------
This final rule builds on these efforts by adopting enhanced
supplementary leverage ratio standards for the largest and most
interconnected U.S. banking organizations. The agencies have broad
authority to set regulatory capital standards.\3\ As a general matter,
the agencies' authority to set regulatory capital requirements and
standards for the institutions they regulate derives from the
International Lending Supervision Act (ILSA) \4\ and the PCA provisions
\5\ of the Federal Deposit Insurance Act (FDIA). In enacting ILSA,
Congress codified its intentions, providing that ``it is the policy of
the Congress to assure that the economic health and stability of the
United States and the other nations of the world shall not be adversely
affected or threatened in the future by imprudent lending practices or
inadequate supervision.'' \6\ ILSA encourages the agencies to work with
their international counterparts to establish effective and consistent
supervisory policies, standards, and practices and specifically
provides the agencies authority to set broadly applicable minimum
capital levels \7\ as well as individual capital requirements.\8\
Additionally, ILSA specifically directs U.S. regulators to encourage
governments, central banks, and bank regulatory authorities in other
major banking countries to work toward maintaining and, where
appropriate, strengthening the capital bases of banking institutions
involved in international banking.\9\ With its focus on international
lending and the safety of the broader financial system, ILSA provides
the agencies with the authority to consider an institution's
interconnectedness and other systemic factors when setting capital
standards.
---------------------------------------------------------------------------
\3\ The agencies have authority to establish capital
requirements for depository institutions under the prompt corrective
action provisions of the Federal Deposit Insurance Act (12 U.S.C.
1831o). In addition, the Federal Reserve has broad authority to
establish various regulatory capital standards for BHCs under the
Bank Holding Company Act and the Dodd-Frank Act. See, for example,
sections 165 and 171 of the Dodd-Frank Act (12 U.S.C. 5365 and 12
U.S.C. 5371).
\4\ 12 U.S.C. 3901-3911.
\5\ 12 U.S.C. 1831o.
\6\ 12 U.S.C. 3901(a).
\7\ ``Each appropriate Federal banking agency shall cause
banking institutions to achieve and maintain adequate capital by
establishing levels of capital for such banking institutions and by
using such other methods as the appropriate Federal banking agency
deems appropriate.'' 12 U.S.C. 3907(a)(1).
\8\ ``Each appropriate Federal banking agency shall have the
authority to establish such minimum level of capital for a banking
institution as the appropriate Federal banking agency, in its
discretion, deems to be necessary or appropriate in light of the
particular circumstances of the banking institution.'' 12 U.S.C.
3907(a)(2).
\9\ 12 U.S.C. 3907(b)(3)(C).
---------------------------------------------------------------------------
As part of the overall prudential framework for bank capital, the
agencies have long expected institutions to maintain capital well above
regulatory minimums and have monitored banking organizations' capital
adequacy through the supervisory process in accordance with this
expectation. This expectation is also codified for IDIs in the
statutory PCA framework, which requires the agencies to establish
capital ratio thresholds for both leverage and risk-based capital that
banking organizations must satisfy to be considered well capitalized.
Additionally, section 165 of the Dodd-Frank Act requires the Board
to develop enhanced prudential standards for BHCs with total
consolidated assets of $50 billion or more and for designated nonbank
companies (together, section 165 covered companies).\10\ The Dodd-Frank
Act requires that prudential standards for section 165 covered
companies include enhanced leverage standards. In general, the Dodd-
Frank Act directs the Board to implement enhanced prudential standards
that strengthen existing micro-prudential supervision and regulation of
individual companies and incorporate macro-prudential considerations to
reduce threats posed by section 165 covered companies to the stability
of the financial system as a whole. The enhanced prudential standards
must increase in stringency based on the systemic footprint and risk
characteristics of individual companies. When differentiating among
companies for purposes of applying the standards established under
section 165, the Board may consider the companies' size, capital
structure, riskiness, complexity, financial activities, and any other
risk-related factors the Board deems appropriate.\11\
---------------------------------------------------------------------------
\10\ See 12 U.S.C. 5365; 77 FR 593 (January 5, 2012); and 77 FR
76627 (December 28, 2012).
\11\ 12 U.S.C. 5365(a)(2)(A).
---------------------------------------------------------------------------
In the agencies' experience, strong capital is an important
safeguard that helps financial institutions navigate periods of
financial or economic stress. Maintenance of a strong capital base at
the largest, systemically important institutions is particularly
important because capital shortfalls at these institutions can
contribute to systemic distress and can have material adverse economic
effects. Higher capital standards for these institutions would place
additional private capital at risk, thereby reducing the risks for the
Deposit Insurance Fund while improving the ability of these
institutions to serve as a source of credit to the economy during times
of economic stress. Furthermore, the agencies believe that the enhanced
supplementary leverage ratio standards would reduce the likelihood of
resolutions, and would allow regulators to tailor resolution efforts
were a resolution to become necessary. By further enhancing the capital
strength of covered organizations, the enhanced supplementary leverage
ratio standards could counterbalance possible funding cost advantages
that these organizations may enjoy as a result of being perceived as
``too big to fail.''
A. The Supplementary Leverage Ratio
The 2013 revised capital rule comprehensively revises and
strengthens the capital regulations applicable to banking
organizations.\12\ It strengthens the definition of regulatory capital,
increases the minimum risk-based capital requirements for all banking
organizations, and modifies the requirements for how banking
organizations calculate risk-weighted assets. The 2013 revised capital
rule also retains the generally applicable leverage ratio requirement
(generally applicable leverage ratio) that the agencies believe to be a
simple and transparent measure of capital adequacy that is credible to
market participants and ensures a meaningful amount of capital is
available to absorb losses. The minimum generally applicable leverage
[[Page 24530]]
ratio requirement \13\ of 4 percent applies to all IDIs, and is the
``generally applicable'' leverage ratio for purposes of section 171 of
the Dodd-Frank Act. Accordingly, the minimum tier 1 leverage ratio
requirement for depository institution holding companies is also 4
percent.\14\
---------------------------------------------------------------------------
\12\ 78 FR 55340 (September 10, 2013) (FDIC) and 78 FR 62018
(October 11, 2013) (OCC and Board). On April 8, 2014, the FDIC
adopted as final the 2013 revised capital rule, with no substantive
changes.
\13\ The generally applicable leverage ratio under the 2013
revised capital rule is the ratio of a banking organization's tier 1
capital to its average total consolidated assets as reported on the
banking organization's regulatory report minus amounts deducted from
tier 1 capital.
\14\ 12 U.S.C. 5371.
---------------------------------------------------------------------------
In the 2013 revised capital rule, the agencies established a
minimum supplementary leverage ratio requirement of 3 percent for
banking organizations subject to the banking agencies' advanced
approaches rules (advanced approaches banking organizations) \15\ based
on the BCBS's Basel III leverage ratio (Basel III leverage ratio) as it
was established at the time.\16\ The agencies believe the introduction
of the leverage ratio by the BCBS is an important step in improving the
framework for international capital standards. The Basel III leverage
ratio is a non-risk-based measure of tier 1 capital relative to an
exposure amount that includes both on- and off-balance sheet exposures.
The agencies implemented the Basel III leverage ratio through the
supplementary leverage ratio, which the agencies believe to be
particularly relevant for large, complex organizations that are
internationally active and often have substantial off-balance sheet
exposures.
---------------------------------------------------------------------------
\15\ A banking organization is subject to the advanced
approaches rule if it has consolidated assets of at least $250
billion, if it has total consolidated on-balance sheet foreign
exposures of at least $10 billion, if it elects to apply the
advanced approaches rule, or it is a subsidiary of a depository
institution, bank holding company, or savings and loan holding
company that uses the advanced approaches to calculate risk-weighted
assets. See 78 FR 62018, 62204 (October 11, 2013); 78 FR 55340,
55523 (September 10, 2013).
\16\ The BCBS is a committee of banking supervisory authorities,
which was established by the central bank governors of the G-10
countries in 1975. It currently consists of senior representatives
of bank supervisory authorities and central banks from Argentina,
Australia, Belgium, Brazil, Canada, China, France, Germany, Hong
Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico,
the Netherlands, Russia, Saudi Arabia, Singapore, South Africa,
Sweden, Switzerland, Turkey, the United Kingdom, and the United
States. Documents issued by the BCBS are available through the Bank
for International Settlements Web site at http://www.bis.org. See
BCBS, ``Basel III: A global regulatory framework for more resilient
banks and banking systems'' (December 2010 (revised June 2011)),
available at http://www.bis.org/publ/bcbs189.htm.
---------------------------------------------------------------------------
The agencies' supplementary leverage ratio is the arithmetic mean
of the ratio of an advanced approaches banking organization's tier 1
capital to total leverage exposure (each as defined in the 2013 revised
capital rule) calculated as of the last day of each month in the
reporting quarter. In contrast to the denominator of the agencies'
generally applicable leverage ratio, which includes only on-balance
sheet assets, the denominator for the supplementary leverage ratio is
based on a banking organization's total leverage exposure, which
includes all on-balance sheet assets and many off-balance sheet
exposures. The 2013 revised capital rule requires that an advanced
approaches banking organization calculate and report its supplementary
leverage ratio beginning in 2015 and maintain a supplementary leverage
ratio of at least 3 percent beginning in 2018.
Because total leverage exposure includes off-balance sheet
exposures, for any given company with material off-balance sheet
exposures the amount of capital required to meet the supplementary
leverage ratio will exceed the amount of capital that is required to
meet the generally applicable leverage ratio, assuming that both ratios
are set at the same level. To illustrate, as the agencies noted in the
2013 NPR, based on supervisory estimates for a group of advanced
approaches banking organizations using supervisory data as of third
quarter 2012,\17\ a 5 percent supplementary leverage ratio corresponds
to roughly a 7.2 percent generally applicable leverage ratio and a 6
percent supplementary leverage ratio corresponds to roughly an 8.6
percent generally applicable leverage ratio. According to supervisory
estimates, 2013 data yield similar results. These estimates represent
averages and the numbers vary from institution to institution.
---------------------------------------------------------------------------
\17\ The supervisory estimates were generated using CCAR
September 2012 and CCAR September 2013 data.
---------------------------------------------------------------------------
The agencies noted in the 2013 revised capital rule and in the 2013
NPR that the BCBS planned to collect additional data from institutions
in member countries and potentially make adjustments to the Basel III
leverage ratio requirement. The agencies indicated that they would
review any modifications to the Basel III leverage ratio made by the
BCBS and consider proposing to modify the supplementary leverage ratio
consistent with those revisions, as appropriate.
In June 2013, the BCBS published and requested comment on a
consultative paper that proposed significant modifications to the
denominator of the Basel III leverage ratio (consultative paper).\18\
The consultative paper proposed a number of approaches that generally
would increase the denominator of the leverage ratio originally set out
in the 2010 Basel III framework. Based on its review of comments on the
consultative paper, in January 2014, the BCBS adopted certain aspects
of the proposals in the consultative paper as well as other changes to
the denominator (BCBS 2014 revisions).\19\ The BCBS has indicated that
it will continue to study the Basel III leverage ratio through the
implementation phase into 2017 and will consider further modifications
to the ratio.
---------------------------------------------------------------------------
\18\ See BCBS ``Revised Basel III leverage ratio framework and
disclosure requirements--consultative document'' (June 2013)
available at http://www.bis.org/publ/bcbs251.htm.
\19\ See BCBS ``Basel III leverage ratio framework and
disclosure requirements'' (January 2014) available at http://www.bis.org/publ/bcbs270.htm.
---------------------------------------------------------------------------
As discussed further below, several commenters raised concerns
about the agencies' intention to adopt the proposed enhanced
supplementary leverage ratio standards while the BCBS continues to
revise the Basel III leverage ratio. The agencies believe that it is
important to maintain consistency with international standards, as
appropriate, for internationally active banking organizations and,
accordingly, have published a separate notice of proposed rulemaking
elsewhere in today's Federal Register that seeks public comment on
revisions to the denominator of the supplementary leverage ratio that
would be applicable to advanced approaches banking organizations (2014
NPR). These proposed revisions are generally consistent with the BCBS
2014 revisions.
The agencies also believe that it is important to establish
enhanced supplementary leverage ratio standards for the largest, most
interconnected banking organizations to strengthen the overall
regulatory capital framework in the United States. Therefore, after
reviewing comments on the 2013 NPR, the agencies are finalizing the
enhanced supplementary leverage ratio standards substantially as
proposed, based on the methodology for determining the supplementary
leverage ratio in the 2013 revised capital rule. As discussed further
below, the agencies believe the proposed changes to the supplementary
leverage ratio denominator in the 2014 NPR would be responsive to some
of the concerns that commenters raised in connection with the 2013 NPR.
The agencies will carefully consider all comments received on the
proposed revisions to the supplementary leverage
[[Page 24531]]
ratio calculation in the 2014 NPR, including those related to the
impact of the proposed changes on advanced approaches banking
organizations' capital requirements.
B. The Proposed Enhanced Supplementary Leverage Ratio Standards
The 2013 NPR proposed applying enhanced supplementary leverage
standards to any U.S. top-tier BHC that has more than $700 billion in
total consolidated assets or more than $10 trillion in assets under
custody and any IDI subsidiary of such a BHC.\20\ As explained in the
2013 NPR, the list of covered BHCs identified by these thresholds is
consistent with the list of banking organizations that meet the BCBS
definition of a global systemically important bank (G-SIB), based on
year-end 2011 data.\21\ In November 2011, the BCBS released a document
entitled, Global Systemically Important Banks (G-SIBs): Assessment
methodology and the additional loss absorbency requirement, which sets
out a framework for a new capital surcharge for G-SIBs (BCBS G-SIB
framework).\22\ The BCBS G-SIB framework incorporates five broad
characteristics of a banking organization that the agencies consider to
be good proxies for, and correlated with, systemic importance: Size,
complexity, interconnectedness, lack of substitutes, and cross-border
activity. Further, the Board believes that the criteria and methodology
used by the BCBS to identify G-SIBs are consistent with the criteria it
must consider under the Dodd-Frank Act when tailoring enhanced
prudential standards based on the systemic footprint and risk
characteristics of individual section 165 covered companies.\23\
---------------------------------------------------------------------------
\20\ Under the 2013 NPR, applicability of the proposed enhanced
supplementary leverage ratio standards would have been determined
based on assets reported on a BHC's most recent Consolidated
Financial Statement for Bank Holding Companies (FR Y-9C) or based on
assets under custody as reported on a BHC's most recent Banking
Organization Systemic Risk Report (FR Y-15).
\21\ In November 2012, the Financial Stability Board and BCBS
published a list of banks that meet the BCBS definition of a G-SIB
based on year-end 2011 data. A revised list based on year-end 2012
data was published November 11, 2013 (available at http://www.financialstabilityboard.org/publications/r_131111.pdf). The
U.S. top-tier bank holding companies that are currently identified
as G-SIBs are Bank of America Corporation, The Bank of New York
Mellon Corporation, Citigroup Inc., Goldman Sachs Group, Inc., JP
Morgan Chase & Co., Morgan Stanley, State Street Corporation, and
Wells Fargo & Company.
\22\ Available at http://www.bis.org/publ/bcbs207.pdf. The BCBS
published a revised version of this document in July 2013, available
at http://www.bis.org/publ/bcbs255.pdf.
\23\ See 12 U.S.C. 5365(a).
---------------------------------------------------------------------------
Under the 2013 NPR, a covered BHC would have been subject to a
leverage buffer composed of tier 1 capital, in addition to the minimum
3 percent supplementary leverage ratio requirement established in the
2013 revised capital rule. Under the 2013 NPR, a covered BHC that
maintains a leverage buffer of tier 1 capital in an amount greater than
2 percent of its total leverage exposure would not have been subject to
limitations on its distributions and discretionary bonus payments. If a
covered BHC were to maintain a leverage buffer of 2 percent or less, it
would have been subject to increasingly strict limitations on its
distributions and discretionary bonus payments. The proposed leverage
buffer followed the same general mechanics and structure as the capital
conservation buffer contained in the 2013 revised capital rule. Any
constraints on distributions and discretionary bonus payments resulting
from a covered BHC maintaining a leverage buffer of 2 percent or less
would have been independent of any constraints imposed by the capital
conservation buffer or other supervisory or regulatory measures.
As noted in the 2013 NPR, the 2013 revised capital rule
incorporated the 3 percent supplementary leverage ratio minimum
requirement into the PCA framework as an adequately capitalized
threshold for IDIs subject to the advanced approaches risk-based
capital rules, but did not establish a well-capitalized threshold for
this ratio. Under the 2013 NPR, an IDI that is a subsidiary of a
covered BHC would have been required to satisfy a 6 percent
supplementary leverage ratio to be considered well-capitalized for PCA
purposes.
II. Summary of Comments on the 2013 NPR
The agencies sought comment on all aspects of the 2013 NPR and
received approximately 30 public comments from banking organizations,
trade associations representing the banking or financial services
industry, supervisory authorities, public interest advocacy groups,
private individuals, members of Congress, and other interested parties.
In general, comments from financial services firms, banking
organizations, banking trade associations and other industry groups
were critical of the 2013 NPR, while comments from organizations
representing smaller banks or their supervisors, public interest
advocacy groups and the public generally were supportive of the 2013
NPR. A detailed discussion of commenters' concerns and the agencies'
response follows.
A. Timing of the Final Rule
A number of commenters made reference to the BCBS consultative
paper that proposed to revise the denominator for the Basel III
leverage ratio.\24\ While the proposals outlined in the BCBS
consultative paper were not part of the 2013 NPR, commenters stated
that they believe the final BCBS changes eventually will be
incorporated into the U.S. supplementary leverage ratio, and that it
would be premature to finalize the 2013 NPR before the BCBS process is
complete. Commenters recommended that a final rule adopting the
proposed enhanced supplementary leverage ratio standards be delayed
until the BCBS finalized the consultative paper and the Board adopted a
final rule implementing enhanced prudential standards under section 165
of the Dodd Frank Act.\25\ In addition, these commenters argued that
the proposed enhanced supplementary leverage ratio standards, if
applied in conjunction with the denominator changes proposed in the
BCBS consultative paper, would result in inappropriately high capital
charges.
---------------------------------------------------------------------------
\24\ See BCBS, ``Revised Basel III leverage ratio framework and
disclosure requirements--consultative document'' (June 2013),
available at http://www.bis.org/publ/bcbs251.htm.
\25\ The Board's proposed rules to implement the provisions of
sections 165 and 166 of the Dodd-Frank Act for bank holding
companies with total consolidated assets of $50 billion or more and
for nonbank financial firms supervised by the Board (domestic
proposal) and for foreign banking organizations with total
consolidated assets of $50 billion or more and foreign nonbank
financial companies supervised by the Board (foreign proposal) can
be found at 77 FR 594 (January 5, 2012) and 77 FR 76628 (December
28, 2012) for the domestic proposal and foreign proposal,
respectively. The Board's final rule implementing these provisions
is available at http://www.federalreserve.gov/newsevents/press/bcreg/20140218a.htm.
---------------------------------------------------------------------------
The agencies emphasize that the 2013 NPR did not propose or seek
comment on the revisions to the supplementary leverage ratio
denominator that were being considered by the BCBS. The agencies are
moving forward with the finalization of the proposed enhanced
supplementary leverage ratio standards to further enhance the capital
position of covered organizations and to strengthen financial
stability. As noted earlier, the agencies are seeking comment elsewhere
in today's Federal Register on the 2014 NPR, which proposes revisions
to the definition of total leverage exposure in the 2013 revised
capital rule as well as other proposed requirements relating to the
supplementary leverage ratio that would reflect the BCBS 2014
revisions. The
[[Page 24532]]
agencies believe that the proposed revisions to the definition of total
leverage exposure in the 2014 NPR are responsive to a number of
concerns that commenters expressed about the relationship between the
BCBS process and the supplementary leverage ratio. As noted above, the
agencies will carefully review all comments received on the 2014 NPR.
B. Scope of Application
The 2013 NPR would have applied enhanced supplementary leverage
ratio standards to the largest, most interconnected U.S. BHCs and their
subsidiary IDIs (specifically, to any U.S. top-tier BHC with more than
$700 billion in total consolidated assets or more than $10 trillion in
assets under custody and any IDI subsidiary of these BHCs).\26\ Several
commenters criticized the 2013 NPR's scope of application, including
the proposed quantitative thresholds for determining applicability of
the enhanced supplementary leverage ratio standards. These commenters
stated that tying the application of the 2013 NPR to size alone would
not be appropriate, as size is not always a reliable indicator of the
degree of risk to financial stability. In addition, commenters stated
that the quantitative thresholds may capture the G-SIBs today, but
there is no assurance that this will be the case in the future. A few
commenters asserted that applicability should be based on the systemic
risk posed by an institution's failure and not just on quantitative
thresholds. For instance, one commenter suggested extending the
applicability of the final rule beyond the largest financial
institutions to institutions that are smaller, but nonetheless are
integral parts of the financial system. A few commenters favored
expanding the quantitative thresholds of the 2013 NPR to include
additional banking organizations, for example, by applying the proposed
enhanced supplementary leverage ratio standards to all advanced
approaches banking organizations. Some commenters asserted that using
assets under custody as one of the metrics to determine the 2013 NPR's
applicability significantly overstates the risk of the custody bank
business model. In addition, several commenters suggested that it is
not clear that the enhanced supplementary leverage ratio standards are
necessary or appropriate for any organization. These commenters stated
that substantial steps have been taken toward addressing ``too big to
fail'' concerns, and that the 2013 NPR should not be extended to
banking organizations that, in the commenters' view, may not present
systemic risk.
---------------------------------------------------------------------------
\26\ Under the 2013 revised capital rule, a ``subsidiary'' is
defined as a company controlled by another company, and a person or
company ``controls'' a company if it: (1) Owns, controls, or holds
with power to vote 25 percent or more of a class of voting
securities of the company; or (2) consolidates the company for
financial reporting purposes. See section 2 of the 2013 revised
capital rule.
---------------------------------------------------------------------------
The agencies have decided to finalize the proposed enhanced
supplementary leverage ratio standards, including the proposed
applicability thresholds, substantively as proposed. In the agencies'
view, the proposed asset thresholds capture banking organizations that
are so large or interconnected that they pose substantial systemic
risk. As explained above, these banking organizations have also been
identified by the BCBS as G-SIBs, which are subject to heightened risk-
based capital standards under the Basel framework. The agencies believe
the application of the enhanced supplementary leverage ratio standards
to covered organizations is an appropriate way to further strengthen
the ability of the these organizations to remain a going concern during
times of economic stress and to minimize the likelihood that problems
at these organizations would contribute to financial instability.
The agencies continue to believe that the benefits to financial
stability of the enhanced supplementary leverage ratio standards are
most pronounced for these large and systemically important
institutions, and have decided not to extend these enhanced standards
to smaller institutions. In addition, as also discussed in the 2013
NPR, it is anticipated that over time, as the BCBS G-SIB framework is
implemented in the United States or revised by the BCBS, the agencies
may consider modifying the scope of application of the enhanced
supplementary leverage ratio standards to align more closely with the
scope of application of the BCBS G-SIB framework. In addition, the
agencies will otherwise continue to evaluate the applicability
thresholds and may consider revising them in the future to ensure they
remain appropriate.
C. Calibration of the Enhanced Supplementary Leverage Ratio Standards
The agencies received several comments expressing concern with the
proposed calibration of the enhanced supplementary leverage ratio
standards. Commenters stated that the proposed enhanced supplementary
leverage ratio standards should be set no higher than those that would
apply to banking organizations in other jurisdictions to maintain the
competitive position of covered organizations with respect to their
foreign competitors. A number of commenters viewed the proposed
calibration as arbitrary, stating that it should be supported by
quantitative studies of the cumulative impact of the enhanced
supplementary leverage ratio standards and other financial reforms on
the ability of U.S. banking organizations to provide financial services
to customers and businesses. A number of commenters stated that the
2013 NPR would cause the supplementary leverage ratio to become the
binding regulatory capital constraint, rather than a backstop to the
risk-based capital measures, and expressed concern that an unintended
consequence of a binding supplementary leverage ratio could be that
covered organizations would divest lower risk assets and instead assume
more risk, to the detriment of financial stability.
Some commenters expressed concern that a binding supplementary
leverage ratio could have negative consequences, including the creation
of disincentives for banking organizations to engage in robust risk
assessment and management practices. Furthermore, according to
commenters, the 2013 NPR could incentivize banking organizations to
engage in financial activities with a higher risk-reward profile as
there would be no regulatory capital benefit for holding low-risk
assets, potentially resulting in institutions that are less stable. For
instance, one commenter stated that unsecured commercial loans would be
more attractive than secured lines of credit because the former have a
stronger return on assets and both would require equal amounts of
regulatory capital under the supplementary leverage ratio framework.
The commenter warned that in the mortgage banking industry, this could
constrain warehouse lines of credit needed to finance the production of
new mortgages and mortgage-backed securities. Another commenter stated
that the proposed enhanced supplementary leverage ratio standards could
make it uneconomical for covered organizations to hold or provide
unfunded revolving lines of credit with maturities of less than one
year, cash, U.S. Treasuries, reverse repurchase agreements, certain
traditional interest rate swaps, and credit default swaps on corporate
bonds. Other commenters maintained that the 2013 NPR could incentivize
banking organizations to hold the lowest quality assets possible within
the constraints of the other credit quality regulations and, thus,
would be fundamentally at odds with the
[[Page 24533]]
agencies' proposed liquidity coverage ratio (LCR) by encouraging
banking organizations to divest low-risk assets above the minimum
required by the proposed LCR.\27\ In addition, according to commenters,
banking organizations would find high-volume, low-risk and low-return,
client-driven financial activities less profitable, such as deposit
taking. As such, commenters stated that a binding leverage ratio would
result in higher prices, less liquidity, and reduction of business
lines that have lower returns on assets.
---------------------------------------------------------------------------
\27\ On November 29, 2013, the agencies issued a joint notice of
proposed rulemaking that would implement quantitative liquidity
requirements for certain banking organizations. See 78 FR 71818
(November 29, 2013).
---------------------------------------------------------------------------
Some commenters recommended that the agencies use a more tailored
approach to calibrate the proposed enhanced supplementary leverage
ratio standards, for example by proposing a leverage buffer for covered
BHCs that would be aligned with the capital surcharges provided in the
BCBS G-SIB framework. These commenters asserted that there is
significant diversity among G-SIBs in risk profile, operating
structure, and approaches to balance sheet management and that a one-
size-fits-all approach is unduly punitive for banking organizations
with significant amounts of highly liquid, low-risk assets.
In contrast, a few commenters stated that the supplementary
leverage ratio is a more accurate measure of regulatory capital than
the risk-based capital ratios, easier to understand, comparable across
firms, less prone to manipulation and, therefore, should be the binding
capital standard. Commenters supported a revised calibration as strong,
or stronger, than the one set forth in the 2013 NPR. For example, some
commenters suggested substantially increasing the proposed enhanced
supplementary leverage ratio standards for covered organizations (for
example, by implementing an 8 percent well-capitalized threshold for
any IDI subsidiary of a covered BHC and a 4 or 5 percent leverage
buffer (in addition to the minimum 3 percent) for covered BHCs). These
commenters argued that incentivizing covered organizations to be better
capitalized as a group through the proposed standards would improve
their ability to provide credit during periods of economic stress.
Others supported either increasing or maintaining the proposed
calibration of the enhanced supplementary leverage ratio standards by
emphasizing the importance of constraining the risks large institutions
pose to the financial system. Other commenters supported strengthening
the supplementary leverage ratio standards based on their view that the
risk-based capital framework is subjective and may excessively rely on
the use of models.
With regard to the concerns raised by commenters about potential
competitive disadvantages for covered organizations as a result of the
proposed enhanced supplementary leverage ratio standards, in the
agencies' experience, a strong regulatory capital base is a competitive
strength for banking organizations, rather than a competitive weakness.
Specifically, strong capital promotes confidence among banking
organizations' market counterparties and bolsters the ability of
banking organizations to lend and otherwise serve customers during
stressed market conditions. The agencies are of the view that a
strongly capitalized banking system also promotes the resilience of the
broader economy because it promotes the stability of the financial
system, which allows a wide range of firms to efficiently access
funding and liquidity to meet their business needs. The agencies also
note that banking organizations in the U.S. have long been subject to a
leverage ratio framework, whereas banking organizations in other
jurisdictions generally have not been subject to any leverage
requirement. The agencies do not believe this longstanding difference
has adversely affected the competitive strength of U.S. banking
organizations. Finally, the agencies believe that the benefits to the
banking and financial system from more resilient systemically important
banking organizations outweigh any potential competitive disadvantages
of related implementation costs that covered organizations may face.
With regard to the comments asserting that the proposed enhanced
supplementary leverage ratio standards were arbitrary, the 2013 NPR
described the agencies' approach to calibration. According to the
agencies' analysis, a 3 percent minimum supplementary leverage ratio
would have been too low to have meaningfully constrained the buildup of
leverage at the largest institutions in the years leading up to the
financial crisis. To address this issue the agencies proposed the
enhanced supplementary leverage ratio standards.
The agencies believe that the leverage and risk-based capital
ratios play complementary roles, with each offsetting potential
weaknesses of the other. The 2013 revised capital rule implemented the
capital conservation buffer framework (which is only applicable to
risk-based capital ratios) and increased risk-based capital
requirements more than it increased leverage requirements, reducing the
ability of the leverage requirements to act as an effective complement
to the risk-based requirements, as they had historically. As a result,
the degree to which covered organizations could potentially benefit
from active management of risk-weighted assets before they breach the
leverage requirements may be greater. As described in the 2013 NPR,
such potential behavior suggests that the increase in stringency of the
leverage and risk-based standards should be more closely calibrated to
each other so that they remain in an effective complementary
relationship. These considerations were important in calibrating the
enhanced supplementary leverage ratio standards. Specifically, the 2013
NPR noted that the proposed enhanced supplementary leverage ratio's
well-capitalized threshold for IDI subsidiaries of covered BHCs and the
proposed leverage buffer for covered BHCs would retain a degree of
proportionality with the stronger tier 1 risk-based capital standards
(including the minimum risk-based capital requirements and the capital
conservation buffer) under the 2013 revised capital rule.
Consistent with the calibration goals described in the 2013 NPR,
the agencies believe that the proposed enhanced supplementary leverage
ratio standards should broadly preserve the historical relationship
between the tier 1 leverage and risk-based capital levels for covered
organizations, rather than fundamentally alter such a relationship as
several commenters suggest. With respect to IDI subsidiaries of covered
BHCs, the increase in stringency in terms of the additional tier 1
capital that would be required to be well capitalized under the
enhanced supplementary leverage ratio standards is roughly equivalent
to the increase in stringency resulting from the application of the
2013 revised capital rule's risk-based capital standards.
Moreover, in response to comments suggesting that the supplementary
leverage ratio well-capitalized threshold for an IDI subsidiary of a
covered BHC should result in the same amount of capital needed by a
covered BHC to meet the minimum supplementary ratio requirement plus
the proposed leverage buffer, the agencies note that the PCA framework
and the proposed leverage buffer were designed for different purposes.
The PCA framework is intended to ensure that problems at depository
institutions are addressed promptly and at the least cost to the
Deposit Insurance Fund. The leverage buffer (as well as the capital
[[Page 24534]]
conservation buffer) was designed and calibrated to provide incentives
to banking organizations to hold sufficient capital to reduce the risk
that their capital levels would fall below their minimum requirements
during times of economic and financial stress. In addition, as
discussed in the 2013 NPR, the relationship between the 5 percent
supplementary leverage ratio for covered BHCs (resulting from the 3
percent minimum supplementary leverage ratio plus the 2 percent
leverage buffer) and the 6 percent supplementary leverage ratio's well-
capitalized threshold for IDI subsidiaries of covered BHCs is generally
structurally consistent with the relationship between the 4 percent
minimum leverage ratio for BHCs and the 5 percent well-capitalized
leverage ratio threshold for IDIs under the generally applicable
regulatory capital framework, including as revised under the 2013
revised capital rule.
The agencies note that the maintenance of a complementary
relationship between the leverage and risk-based capital ratios is
designed to mitigate any regulatory capital incentives for covered
organizations to inappropriately increase their risk profile in
response to a binding supplementary leverage ratio. Similarly, stress
testing provides another mechanism to counterbalance the risk that
these institutions could potentially increase their risk profile in
response to a binding supplementary leverage ratio. If the
supplementary leverage ratio is binding and covered organizations
acquire more higher-risk assets, risk weights should increase until the
risk-based capital framework becomes binding. Conversely, if a binding
risk-based capital ratio induces an institution to expand portfolios
whose risk is insufficiently addressed by the risk-based capital
framework, its total leverage exposure would increase until the
leverage ratio becomes binding. Moreover, the agencies believe that
banking organizations choose their asset mix based on a variety of
factors, including yields available relative to the overall cost of
funds, the need to preserve financial flexibility and liquidity,
revenue generation and the maintenance of market share and business
relationships, and the likelihood that principal will be repaid.
The agencies also believe that the enhanced supplementary leverage
ratio standards, together with the strong risk-based regulatory capital
framework in the 2013 revised capital rule, will increase stability and
improve safety and soundness in the banking system. In particular, the
agencies believe that the complementary relationship between the
enhanced supplementary leverage ratio standards and the risk-based
capital framework under the 2013 revised capital rule will strengthen
capital positions at covered organizations, thereby reducing the
likelihood that they fail or experience severe difficulties.
With regard to the comments suggesting that the calibration of the
enhanced supplementary leverage ratio should vary in accordance with
the specific systemic footprint of a covered organization, the agencies
note that such issues are addressed in part by the risk-differentiation
that exists within the risk-based capital framework. The agencies
believe that all covered organizations, despite differences in business
models, are systemically important and highly interconnected and,
therefore, uniformly-applied leverage capital standards across these
organizations are warranted.
D. Economic Impact of the 2013 NPR on Specific Types of Securities and
Credit Transactions and on the Custody Bank Business Model
Commenters also expressed concern about the effect the 2013 NPR
would have for particular types of transactions and business models.
Commenters asserted that the 2013 NPR would directly affect short-term
securities financing transactions, including repurchase agreements,
reverse repurchase agreements, and revolving lines of credit, among
other similar transactions, by imposing additional capital requirements
on low-risk exposures held by covered organizations when they enter
into these arrangements. Some commenters argued that the enhanced
supplementary leverage ratio standards may encourage covered
organizations to reduce their participation in securities financing
transactions. One commenter also indicated that the 2013 NPR would
result in the entrance into the securities financing transactions
market of smaller, less-experienced, and less well-capitalized
counterparties who may fall outside existing regulatory oversight,
resulting in additional systemic risk due to insufficient oversight of
these counterparties. That commenter argued that the 2013 NPR may
result in the overexposure to individual counterparties, because
covered organizations could conclude that securities financing
transactions are more costly to them and, as a result, may limit the
availability (or the best terms) of this financing to only those asset
managers to whom they provide other lines of service. In addition,
commenters asserted that asset managers might respond by directing
business to a single large banking organization in order to receive the
best terms for securities financing transactions.
Several commenters argued that there would be less flexibility for
mutual fund managers and insurance companies to execute certain
transactions with covered organizations as a result of the enhanced
supplementary leverage ratio standards, which could give rise to less
liquid markets at the time that liquidity is needed the most. These
commenters indicated that when mutual fund redemptions rise because
individual investors desire liquidity, investment managers are required
to meet those redemption requests immediately, and that if many
requests come at once, the investment manager will use securities
financing arrangements to smooth out the flow of capital, rather than
be forced to sell investments in a rapid or disorderly fashion.
Commenters also noted that if securities financing arrangements are
less accessible, an investment manager may incur higher costs related
to the forced sale of underlying securities.
Some commenters suggested that the agencies recalibrate the
enhanced supplementary leverage ratio standards to better reflect the
business model and risk profile of custody banks, either through an
approach tied to each covered company's G-SIB risk-based capital
surcharge (which incorporates various measures to identify systemic
risk) or an adjustment specific to these organizations, because a one-
size-fits-all approach would be unduly punitive for covered
organizations with significant amounts of highly liquid, low-risk
assets. One commenter asserted that custody banks have balance sheets
that are uniquely constructed as they are built around client deposits
derived from the provision of core safekeeping and fund administration
services, whereas most other covered organizations feature extensive
commercial and investment banking operations. Some commenters asserted
that the enhanced supplementary leverage ratio standards would
significantly punish or effectively limit important custody bank
functions such as those which are associated with central bank deposits
and committed facilities. These commenters also noted that the enhanced
supplementary leverage ratio standards may limit the ability of custody
banks to accept deposits, particularly during periods of systemic
stress. One commenter asserted that global payment systems could be
adversely affected by a
[[Page 24535]]
reduction in central bank balances, which are broadly used by banking
organizations to reduce the risk of payment failures and facilitate
consistent and smooth payment flows. In addition, some commenters
asserted that the enhanced supplementary leverage ratio standards would
reduce incentives to hold low-risk assets and would increase the cost
to comply with increased margin requirements, particularly initial
margin, for derivatives transactions. The agencies note that several of
the commenters' concerns were related to aspects of the BCBS
consultative paper.
With regard to the comments expressing concern about the impact of
the enhanced supplementary leverage ratio standards on securities
financing transactions, the agencies believe that certain provisions of
the 2014 NPR would address several of these concerns. In addition, the
agencies believe it is important to consider that counterparties may
view favorably a banking organization's maintenance of a meaningfully
higher supplementary leverage ratio. To the extent this occurs, there
might be some reduction in a banking organization's cost of funds that
potentially offsets any costs related to holding more regulatory
capital. In this regard, the agencies also note that any change in
regulatory capital costs would affect a banking organization's overall
cost of funds only to the extent it affects the weighted average cost
of its deposits, debt, and equity.
The agencies believe that using daily average balance sheet assets,
rather than requiring the average of three end-of-month balances in the
calculation of the supplementary leverage ratio under the 2013 revised
capital rule would be an appropriate way to address the commenters'
concerns on the impact of spikes in deposits and, in the 2014 NPR, are
proposing changes to the calculation of total leverage exposure that
would incorporate this concept.
Likewise, for purposes of determining total leverage exposure, the
2014 NPR would permit cash variation margin that satisfies certain
requirements to reduce the positive mark-to-fair value of derivative
contracts. The agencies believe this proposed revision in the 2014 NPR
would address the commenters' concerns regarding the potential increase
in the cost to comply with increased margin requirements.
E. Measure of Capital Used as the Numerator of the Supplementary
Leverage Ratio
The agencies sought comment on the appropriate measure of capital
for the numerator of the supplementary leverage ratio. Many commenters
supported tier 1 capital as the appropriate measure of capital for the
numerator of the supplementary leverage ratio because it is designed
specifically to absorb losses on a going concern basis and has been
meaningfully strengthened under the 2013 revised capital rule.
One commenter encouraged the agencies to allow covered banking
organizations to include the amount of a covered organization's
allowance for loan and lease losses (ALLL) because it is available to
absorb losses. A few commenters, however, asserted that the numerator
of the supplementary leverage ratio should be common equity tier 1
(CET1) capital. One commenter supported this assertion with the
observation that CET1 capital is the standard most likely to keep an
institution solvent and able to lend during periods of market distress,
and suggested it would be the only measure of capital strength trusted
by the markets during a financial crisis. Another commenter asserted
that a tangible equity measure is preferable because it is the most
simple, transparent, and useful measure of loss-absorbing capital.
One commenter recognized the importance of having a single
definition of tier 1 capital for both risk-based and leverage
requirements, but urged the agencies to revisit the treatment of
unrealized gains and losses included in accumulated other comprehensive
income (AOCI) for large banking organizations under the 2013 revised
capital rule.
The agencies have considered the comments and have decided to
retain tier 1 capital as the numerator of the supplementary leverage
ratio. The agencies agree that CET1 capital is the most conservative
measure of capital defined in the 2013 revised capital rule and has the
highest capacity to absorb losses, similar to most common descriptions
of ``tangible common equity.'' However, as a practical matter for U.S.
banking organizations, tier 1 capital consists of CET1 capital plus
non-cumulative perpetual preferred stock, a form of preferred stock
that the agencies believe has strong loss-absorbing capacity.
Accordingly, the agencies believe that tier 1 capital, as defined in
the 2013 revised capital rule, is an appropriately conservative measure
of capital for the purposes of the supplementary leverage ratio.
Furthermore, tier 1 capital incorporates substantial regulatory
adjustments and deductions that are not typically made from market
measures of tangible equity. Moreover, using tier 1 capital as the
numerator of the supplementary leverage ratio has the advantage of
maintaining consistency with the numerator of the leverage ratio that
has long applied broadly to U.S. banking organizations and that now
applies to banking organizations in other jurisdictions adopting the
Basel III leverage ratio.
With respect to allowing covered banking organizations to include
ALLL as part of the capital measure for the numerator, the agencies
note that ALLL is partially includable in tier 2 capital under the
risk-based capital framework and under the 2013 revised capital rule.
However, ALLL is not includable in tier 1 capital and the agencies
believe that such an inclusion would weaken the quality of tier 1
capital as it relates to the supplementary leverage ratio when compared
to the risk-based capital framework.
The agencies considered comments on the recognition of unrealized
gains and losses in AOCI in connection with the development of the 2013
revised capital rule, which requires advanced approaches banking
organizations to recognize unrealized gains and losses in AOCI for
purposes of determining CET1 capital.\28\ The agencies believe that
requiring a banking organization to reflect unrealized gains and losses
in regulatory capital provides a more accurate depiction of its loss-
absorption capacity at a specific point in time, which is particularly
important for large, internationally active banking organizations. For
this reason and the reasons discussed above, the agencies are retaining
tier 1 capital as the numerator of the enhanced supplementary leverage
ratio standards under this final rule.\29\
---------------------------------------------------------------------------
\28\ Banking organizations that are not subject to the advanced
approaches rule may elect to opt out of the requirement to recognize
unrealized gains and losses in AOCI for purposes of determining CET1
capital.
\29\ See section III.C. of the preamble in the 2013 final
capital rule issued by the Board and OCC for a discussion of
accumulated other comprehensive income. 78 FR 62018, 62026-62027
(October 11, 2013). See section V.B.2.c. of the preamble in the 2013
interim final capital rule issued by the FDIC for a discussion of
accumulated other comprehensive income. 78 FR 55340, 55377-55380
(September 10, 2013).
---------------------------------------------------------------------------
F. Total Leverage Exposure Definition
The 2013 NPR would not have amended the definition of total
leverage exposure (the denominator of the supplementary leverage ratio)
under the 2013 revised capital rule. However, a significant number of
commenters criticized the components and methodology for calculating
total leverage exposure.
[[Page 24536]]
Many commenters asserted that total leverage exposure should be
more risk-sensitive. For instance, commenters encouraged the agencies
to exclude highly liquid assets, such as cash on hand and claims on
central banks, and sovereign securities, particularly U.S. Treasuries,
from total leverage exposure. Commenters maintained that, if the
agencies opt to not exclude risk-free or very low-risk, highly liquid
assets from total leverage exposure, then these assets should be
discounted according to their relative levels of liquidity similar to
the categories of eligible assets under the standardized approach in
the 2013 revised capital rule. In addition, commenters stated that bank
deposits with central banks such as the Federal Reserve Banks should be
excluded in order to accommodate increases in banks' assets, both
temporary and sustained, that occur as a result of macroeconomic
factors and monetary policy decisions, particularly during periods of
financial market stress. Commenters urged the agencies to exclude
assets such as U.S. government obligations securing public sector
entity (PSE) deposits from total leverage exposure. Commenters argued
that a banking organization holding PSE deposits is required to pledge
U.S. Treasuries to collateralize the deposits, and that if U.S.
Treasuries are not excluded from total leverage exposure, the cost of
additional capital would result in higher costs being passed on to the
PSEs. Another commenter, however, asked that the agencies not introduce
any risk-based capital measure into the supplementary leverage
ratio.\30\
---------------------------------------------------------------------------
\30\ One commenter also noted that retaining the proposal to
include U.S. Treasury debt securities in total leverage exposure
could present certain national security concerns.
---------------------------------------------------------------------------
Several commenters encouraged the agencies not to include in total
leverage exposure the notional amount of all off-balance sheet assets,
particularly for undrawn commitments. Commenters stated that using the
notional value is inaccurate, particularly for trade finance and
committed credit lines. Commenters encouraged the agencies to use the
more granular standardized approach credit conversion factors (CCF) in
the 2013 revised capital rule.
With respect to the commenters' request for more risk-sensitivity
in the supplementary leverage ratio calculation, the agencies believe
that excluding categories of assets from the denominator of the
supplementary leverage ratio is generally inconsistent with the
intended role of this ratio as an overall limitation on leverage that
does not differentiate across asset types. Accordingly, the agencies
have decided not to exempt any categories of balance sheet assets from
the denominator of the supplementary leverage ratio in the final rule.
Thus, for example, cash, U.S. Treasuries, and deposits at the Federal
Reserve are included in the denominator of the supplementary leverage
ratio, as has been the case in the agencies' generally applicable
leverage ratio. The agencies recognize the low risk of these assets
under the agencies' risk-based capital rules, which complement the
minimum supplementary leverage ratio requirement and the enhanced
supplementary leverage ratio standards, as discussed above. Excluding
specific categories of assets from the supplementary leverage ratio
denominator would in effect allow banking organizations to finance
these assets exclusively with debt, potentially resulting in a
significant increase in a banking organizations' ability to deploy
financial leverage.
With regard to the comments criticizing the use of the notional
amounts of off-balance sheet commitments for purposes of the
supplementary leverage ratio, the agencies are seeking comment on
proposed changes to the denominator in the 2014 NPR that would include
the use of standardized approach CCFs for most off-balance sheet
commitments.
G. Proposed Basel III Leverage Ratio Revisions
A number of commenters were concerned about the relationship
between the enhanced supplementary leverage ratio standards and the
revisions to the Basel III leverage ratio framework proposed by the
BCBS consultative paper, which proposed a leverage ratio exposure
measure that would result in greater reported exposure than the total
leverage exposure as defined in the 2013 revised capital rule.
A number of commenters were concerned that covered organizations
would be placed at a competitive disadvantage relative to foreign
competitors if the enhanced supplementary leverage ratio standards in
the U.S. are set at a higher level than the Basel III leverage ratio.
Some commenters also expressed concern that the proposed BCBS revisions
to the denominator would be inappropriately restrictive and might be
incorporated into the U.S. supplementary leverage ratio. However,
another commenter argued that a stronger leverage ratio standard would
enhance the competitive position of U.S. banking organizations by
improving the relative stability and financial strength of the U.S.
banking system.
One commenter included a study of the impact of the revisions
proposed in the BCBS's consultative paper, and, where relevant, the
U.S. enhanced supplementary leverage ratio standards, on the U.S.
banking industry, products offered by U.S. banks, and U.S. markets. The
study concludes that, on average, U.S. advanced approaches banking
organizations (including U.S. G-SIBs) exceed the 3 percent
supplementary leverage ratio threshold based both on the ratio as
formulated in the Basel III leverage ratio framework and after giving
effect to the BCBS proposed revisions, but when measured against the
proposed enhanced supplementary leverage ratio standards, U.S. advanced
approaches banking organizations would have substantial tier 1 capital
shortfalls. Specifically, the study suggests that if the revisions
proposed in the consultative paper and the proposed enhanced
supplementary leverage ratio standards were both implemented, the U.S.
advanced approaches banking organizations would need $202 billion in
additional tier 1 capital or a reduction in exposures of $3.7 trillion
to meet those standards, and to meet the proposed enhanced
supplementary leverage ratio standards without giving effect to the
BCBS consultative paper changes, these banking organizations would need
to raise $69 billion in additional capital or reduce exposures by $1.2
trillion. The study suggests that if the agencies adopted the Basel
proposed total leverage exposure as contemplated in the consultative
paper in combination with the proposed enhanced supplementary leverage
ratio standards, the leverage ratio would become the binding constraint
for banking organizations holding 67 percent of U.S. G-SIB assets.
One commenter, on the other hand, encouraged the agencies to revise
the denominator of the supplementary leverage ratio in accordance with
the BCBS's consultative paper. This commenter further encouraged the
agencies to restrict derivatives netting permitted under the BCBS
consultative paper and to substantially increase the standardized
measurement of the potential future exposure for derivative
transactions. Similarly, another commenter asked the agencies to
consider the use of International Financial Reporting Standards (IFRS)
for purposes of measuring off-balance sheet derivatives exposures.
Neither the 2013 NPR nor the final rule includes the changes to
total leverage exposure described in the
[[Page 24537]]
BCBS consultative paper. Therefore, the agencies' supplementary
leverage ratio is consistent with the international leverage ratio
established by the BCBS in 2010. The agencies' analysis of the impact
of this final rule is summarized in the next section of this preamble.
As discussed above, in January 2014 the BCBS adopted certain
aspects of the proposals outlined in the BCBS consultative paper as
well as other changes to the denominator. The changes to the
denominator included, among other items, revising CCFs for certain off-
balance sheet exposures, incorporating the notional amount of sold
credit protection (that is, credit derivatives sold by a banking
organization acting as a credit protection provider) in total leverage
exposure, and modifying the measure of exposure for derivatives and
repo-style transactions, including changes to the criteria for
recognizing netting for repo-style transactions and cash collateral for
derivatives. The agencies believe that the changes introduced by the
BCBS strengthen the Basel III leverage ratio in important ways. In the
2014 NPR, published elsewhere in today's Federal Register, the agencies
are proposing revisions to the supplementary leverage ratio that are
generally consistent with the BCBS 2014 revisions. The agencies believe
that the proposed revisions to the definition of total leverage
exposure published in the 2014 NPR are responsive to a number of
concerns that commenters expressed about the relationship between the
BCBS process and the supplementary leverage ratio. In this regard, the
agencies will carefully review all comments received on these aspects
of the definition of total leverage exposure in the 2014 NPR.
H. Impact Analysis
Commenters suggested that, in addition to waiting for the BCBS to
finalize the denominator of the Basel leverage ratio, the agencies
should conduct a quantitative impact study to assess the cumulative
impact of bank capital and other financial reform regulations on the
ability of U.S. banking organizations to provide financial services to
consumers and businesses.
In the 2013 NPR, the agencies cited data from the Board's
Comprehensive Capital Analysis and Review (CCAR) process in which all
of the agencies participate. This information reflects banking
organizations' own projections of their supplementary leverage ratios
under the supervisory baseline scenario, including institutions' own
assumptions about earnings retention and other strategic actions.
As noted in the 2013 NPR, in the 2013 CCAR, all 8 covered BHCs met
the 3 percent supplementary leverage ratio as of third quarter 2012,
and almost all projected that their supplementary leverage ratios would
exceed 5 percent at year-end 2017. If the enhanced supplementary
leverage ratio standards had been in effect as of third quarter 2012,
covered BHCs under the 2013 NPR that did not exceed a minimum
supplementary leverage ratio requirement of 3 percent plus a 2 percent
leverage buffer would have needed to increase their tier 1 capital by
about $63 billion to meet that ratio.
Because CCAR is focused on the consolidated capital of BHCs, BHCs
did not project future Basel III leverage ratios for their IDIs. To
estimate the impact of the 2013 NPR on the lead subsidiary IDIs of
covered BHCs, the agencies assumed that an IDI has the same ratio of
total leverage exposure to total assets as its BHC. Using this
assumption and CCAR 2013 projections, all 8 lead subsidiary IDIs of
covered BHCs were estimated to meet the 3 percent supplementary
leverage ratio as of third quarter 2012. If the enhanced supplementary
leverage ratio standards had been in effect as of third quarter 2012,
the lead subsidiary IDIs of covered BHCs that did not meet a 6 percent
supplementary leverage ratio would have needed to increase their tier 1
capital by about $89 billion to meet that ratio.
In finalizing the rule, the agencies updated their supervisory
estimates of the amount of tier 1 capital that would be required for
covered BHCs and their lead subsidiary IDIs to meet the enhanced
supplementary leverage ratio standards. Using updated CCAR estimates,
all 8 covered BHCs meet the 3 percent supplementary leverage ratio as
of fourth quarter 2013. If the enhanced supplementary leverage ratio
standards had been in effect as of fourth quarter 2013, CCAR data
suggests that covered BHCs that would not have met a 5 percent
supplementary leverage ratio would have needed to increase their tier 1
capital by about $22 billion to meet that ratio.
Assuming that an IDI has the same ratio of total leverage exposure
to total assets as its BHC to estimate the impact at the IDI level, the
updated CCAR data indicates that all 8 lead subsidiary IDIs of covered
BHCs meet the 3 percent supplementary leverage ratio as of fourth
quarter 2013. If the enhanced supplementary leverage ratio standards
had been in effect as of fourth quarter 2013, the updated CCAR data
suggests that the lead subsidiary IDIs of covered BHCs that did not
meet a 6 percent ratio would have needed to increase their tier 1
capital by about $38 billion to meet that ratio. The agencies believe
that the affected covered BHCs and their subsidiary IDIs would be able
to effectively manage their capital structures to meet the enhanced
supplementary leverage ratio standards in the final rule by January 1,
2018. The agencies believe that this transition period should help to
reduce any short-term consequences and allow covered organizations to
adjust smoothly to the new supplementary leverage ratio standards.
I. Advanced Approaches Framework
The agencies sought comment on whether in light of the proposed
enhanced supplementary leverage ratio standards and ongoing
standardized risk-based capital floors, the agencies should consider,
in some future regulatory action, simplifying or eliminating portions
of the advanced approaches rule if they are unnecessary or duplicative.
One commenter stated that mandatory application of the advanced
approaches rule is based on an outdated size-based threshold, and that
the agencies should review the thresholds for mandatory application of
the advanced approaches risk-based capital rules and consider whether,
in light of recently implemented reforms to the regulatory capital
framework, the criteria remain appropriate or whether they should be
refined given the purpose of those rules. Another commenter recommended
delaying consideration of the proposed enhanced supplementary leverage
ratio standards pending the review and completion of regulatory
initiatives based on the BCBS's discussion paper entitled, The
regulatory framework: balancing risk sensitivity, simplicity and
comparability.\31\
---------------------------------------------------------------------------
\31\ Available at http://www.bis.org/publ/bcbs258.pdf.
---------------------------------------------------------------------------
The agencies are not proposing any changes to the advanced
approaches rule in connection with the final rule. As with any aspect
of the regulatory capital framework, the agencies will continue to
evaluate the appropriateness of the requirements of the advanced
approaches rule in light of this final rule and the ongoing evolution
of the U.S. financial regulatory framework.
III. Description of the Final Rule
For the reasons discussed above, and consistent with the transition
provisions set forth in subpart G of the 2013 revised capital rule, the
agencies have decided to adopt the 2 percent leverage buffer for
covered BHCs and the 6
[[Page 24538]]
percent well-capitalized threshold for subsidiary IDIs of covered BHCs
effective on January 1, 2018. The final rule implements the provisions
in the 2013 NPR as proposed. Accordingly, the final rule applies to any
U.S. top-tier BHC with more than $700 billion in total consolidated
assets or more than $10 trillion in assets under custody and any
advanced approaches IDI subsidiary of such BHCs.
As further discussed above, the agencies are proposing elsewhere in
the Federal Register changes to the calculation of the supplementary
leverage ratio that would amend the 2013 revised capital rule and
change the basis for calculating the supplementary leverage ratio.
Under the final rule, a covered BHC that maintains a leverage
buffer greater than 2 percent of its total leverage exposure is not
subject to the rule's limitations on its distributions and
discretionary bonus payments.\32\ If the covered BHC maintains a
leverage buffer of 2 percent or less, it is subject to increasingly
stricter limitations on such payouts. An IDI that is a subsidiary of a
covered BHC is required to satisfy a 6 percent supplementary leverage
ratio to be considered well capitalized for PCA purposes. The leverage
ratio PCA thresholds under the 2013 revised capital rule and this final
rule are shown in Table 1.
---------------------------------------------------------------------------
\32\ See section 11(a)(4) of the 2013 revised capital rule.
Table 1--Leverage Ratio PCA Levels
----------------------------------------------------------------------------------------------------------------
Supplementary
leverage ratio for Supplementary leverage
PCA category Generally applicable advanced approaches ratio for subsidiary IDIs
leverage ratio (percent) banking organizations of covered BHCs (percent)
(percent)
----------------------------------------------------------------------------------------------------------------
Well Capitalized.................. >=5....................... Not applicable....... >=6.
Adequately Capitalized............ >=4....................... >=3.................. >=3.
Undercapitalized.................. <4........................ <3................... <3.
Significantly Undercapitalized.... <3........................ Not applicable....... Not applicable.
Critically Undercapitalized....... Tangible equity (defined Not applicable....... Not applicable.
as tier 1 capital plus
non-tier 1 perpetual
preferred stock) to Total
Assets <=2.
----------------------------------------------------------------------------------------------------------------
Note: The supplementary leverage ratio includes many off-balance sheet exposures in its denominator; the
generally applicable leverage ratio does not.
All advanced approaches banking organizations must calculate and
begin reporting their supplementary leverage ratios beginning in the
first quarter of 2015. However, the enhanced supplementary leverage
ratio standards for covered organizations set forth in the final rule
do not become effective until January 1, 2018.
IV. Regulatory Analysis
A. Paperwork Reduction Act (PRA)
There is no new collection of information pursuant to the PRA (44
U.S.C. 3501 et seq.) contained in this final rule. The agencies did not
receive any comment on their PRA analysis.
B. Regulatory Flexibility Act Analysis
OCC
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA) requires
an agency, in connection with a final rule, to prepare a Final
Regulatory Flexibility Act analysis describing the impact of the rule
on small entities (defined by the Small Business Administration for
purposes of the RFA to include banking entities with total assets of
$500 million or less) or to certify that the rule will not have a
significant economic impact on a substantial number of small entities.
Using the SBA's size standards, as of December 31, 2013, the OCC
supervised 1,195 small entities.\33\
---------------------------------------------------------------------------
\33\ The OCC calculated the number of small entities using the
SBA's size thresholds for commercial banks and savings institutions,
and trust companies, which are $500 million and $35.5 million,
respectively. 78 FR 37409 (June 20, 2013). Consistent with the
General Principles of Affiliation 13 CFR 121.103(a), the OCC counted
the assets of affiliated financial institutions when determining
whether to classify a national bank or Federal savings association
as a small entity. The OCC used December 31, 2013, to determine size
because a ``financial institution's assets are determined by
averaging the assets reported on its four quarterly financial
statements for the preceding year.'' See footnote 8 of the U.S.
Small Business Administration's Table of Size Standards.
---------------------------------------------------------------------------
As described in the SUPPLEMENTARY INFORMATION section of the
preamble, the final rule strengthens the supplementary leverage ratio
standards for covered BHCs and their IDI subsidiaries. Because the
final rule applies only to covered BHCs and their IDI subsidiaries, it
does not impact any OCC-supervised small entities. Therefore, the OCC
certifies that the final rule will not have a significant economic
impact on a substantial number of OCC-supervised small entities.
Board
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA) requires
an agency to provide a final regulatory flexibility analysis with a
final rule or to certify that the rule will not have a significant
economic impact on a substantial number of small entities (defined for
purposes of the RFA beginning on July 22, 2013, to include banks with
assets less than or equal to $500 million) \34\ and publish its
analysis or a summary, or its certification and a short, explanatory
statement, in the Federal Register along with the final rule.
---------------------------------------------------------------------------
\34\ See 13 CFR 121.201. Effective July 22, 2013, the Small
Business Administration revised the size standards for banking
organizations to $500 million in assets from $175 million in assets.
78 FR 37409 (June 20, 2013).
---------------------------------------------------------------------------
The Board is providing a final regulatory flexibility analysis with
respect to this final rule. As discussed above, this final rule is
designed to enhance the safety and soundness of U.S. top-tier bank
holding companies with at least $700 billion in consolidated assets or
at least $10 trillion in assets under custody (covered BHCs), and the
insured depository institution subsidiaries of covered BHCs. The Board
received no public comments on the proposed rule from members of the
general public or from the Chief Counsel for Advocacy of the Small
Business Administration. Thus, no issues were raised in public comments
relating to the Board's initial regulatory flexibility act analysis and
no changes are being made in response to such comments.
Under regulations issued by the Small Business Administration, a
small entity includes a depository institution or
[[Page 24539]]
bank holding company with total assets of $500 million or less (a small
banking organization). As of December 31, 2013, there were 627 small
state member banks. As of December 31, 2013, there were approximately
3,676 small bank holding companies. No small top-tier bank holding
company would meet the threshold provided in the final rule, so there
would be no additional projected compliance requirements imposed on
small bank holding companies. One covered bank holding company has one
small state member bank subsidiary, which would be covered by the final
rule. The Board expects that any small banking organization covered by
the final rule would rely on its parent banking organization for
compliance and would not bear additional costs.
The Board believes that the final rule will not have a significant
economic impact on small banking organizations supervised by the Board
and therefore believes that there are no significant alternatives to
the final rule that would reduce the economic impact on small banking
organizations supervised by the Board.
FDIC
The RFA requires an agency to provide an FRFA with a final rule or
to certify that the rule will not have a significant economic impact on
a substantial number of small entities (defined for purposes of the RFA
to include banking entities with total assets of $500 million or
less).\35\
---------------------------------------------------------------------------
\35\ Effective July 22, 2013, the SBA revised the size standards
for banking organizations to $500 million in assets from $175
million in assets. 78 FR 37409 (June 20, 2013).
---------------------------------------------------------------------------
As described in sections I and III of this preamble, the final rule
strengthens the supplementary leverage ratio standards for covered BHCs
and their advanced approaches IDI subsidiaries. As of December 31,
2013, 1 (out of 3,394) small state nonmember bank and no (out of 303)
small state savings associations were advanced approaches IDI
subsidiaries of a covered BHC. Therefore, the FDIC does not believe
that the final rule will result in a significant economic impact on a
substantial number of small entities under its supervisory
jurisdiction.
The FDIC certifies that the final rule does not have a significant
economic impact on a substantial number of small FDIC-supervised
institutions.
C. OCC Unfunded Mandates Reform Act of 1995 Determination
Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law
104-4 (Unfunded Mandates Reform Act) provides that an agency that is
subject to the Unfunded Mandates Act must prepare a budgetary impact
statement before promulgating a rule that includes a Federal mandate
that may result in expenditure by State, local, and tribal governments,
in the aggregate, or by the private sector, of $100 million (adjusted
for inflation) or more in any one year. The current inflation-adjusted
expenditure threshold is $141 million. If a budgetary impact statement
is required, section 205 of the UMRA also requires an agency to
identify and consider a reasonable number of regulatory alternatives
before promulgating a rule. The OCC has determined this proposed rule
is likely to result in the expenditure by the private sector of $141
million or more. The OCC has prepared a budgetary impact analysis and
identified and considered alternative approaches. When the final rule
is published in the Federal Register, the full text of the OCC's
analyses will available at: http://www.regulations.gov, Docket ID OCC-
2013-0008.
D. Plain Language
Section 722 of the Gramm-Leach-Bliley Act requires the Federal
banking agencies to use plain language in all proposed and final rules
published after January 1, 2000. The agencies have sought to present
the final rule in a simple and straightforward manner. The agencies did
not receive any comment on their use of plain language.
List of Subjects
12 CFR Part 6
National banks.
12 CFR Part 208
Confidential business information, Crime, Currency, Federal Reserve
System, Mortgages, Reporting and recordkeeping requirements,
Securities.
12 CFR Part 217
Administrative practice and procedure, Banks, Banking, Capital,
Federal Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 324
Administrative practice and procedure, Banks, banking, Capital
Adequacy, Reporting and recordkeeping requirements, Savings
associations, State non-member banks.
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
For the reasons set forth in the preamble and under the authority
of 12 U.S.C. 93a, 1831o, and 5412(b)(2)(B), the Office of the
Comptroller of the Currency amends part 6 of chapter I of title 12,
Code of Federal Regulations as follows:
PART 6--PROMPT CORRECTIVE ACTION
0
1. The authority citation for part 6 continues to read as follows:
Authority: 12 U.S.C. 93a, 1831o, 5412(b)(2)(B).
0
2. Amend Sec. 6.4 by revising paragraph (c)(1)(iv) to read as follows:
Sec. 6.4 Capital measures and capital category definition.
* * * * *
(c) * * *
(1) * * *
(iv) Leverage Measure:
(A) The national bank or Federal savings association has a leverage
ratio of 5.0 percent or greater; and
(B) With respect to a national bank or Federal savings association
that is a subsidiary of a U.S. top-tier bank holding company that has
more than $700 billion in total assets as reported on the company's
most recent Consolidated Financial Statement for Bank Holding Companies
(FR Y-9C) or more than $10 trillion in assets under custody as reported
on the company's most recent Banking Organization Systemic Risk Report
(Y-15), on January 1, 2018 and thereafter, the national bank or Federal
savings association has a supplementary leverage ratio of 6.0 percent
or greater; and
* * * * *
Board of Governors of the Federal Reserve System
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the preamble, chapter II of title 12
of the Code of Federal Regulations is amended as follows:
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
0
3. The authority citation for part 208 is revised to read as follows:
[[Page 24540]]
Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-
338a, 371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9),
1833(j), 1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1831w, 1831x,
1835a, 1882, 2901-2907, 3105, 3310, 3331-3351, 3905-3909, and 5371;
15 U.S.C. 78b, 78I(b), 78l(i), 780-4(c)(5), 78q, 78q-1, and 78w,
1681s, 1681w, 6801, and 6805; 31 U.S.C. 5318; 42 U.S.C. 4012a,
4104a, 4104b, 4106 and 4128.
0
4. In Sec. 208.41, redesignate paragraphs (c) through (j) as
paragraphs (d) through (k), and add a new paragraph (c) to read as
follows:
Sec. 208.41 Definitions for purposes of this subpart.
* * * * *
(c) Covered BHC means a covered BHC as defined in Sec. 217.2 of
Regulation Q (12 CFR 217.2).
* * * * *
0
5. Amend Sec. 208.43 as follows:
0
a. Add paragraph (a)(2)(iv)(C).
0
b. Revise paragraph (c)(1)(iv).
Sec. 208.43 Capital measures and capital category definitions.
(a) * * *
(2) * * *
(iv) * * *
(C) With respect to any bank that is a subsidiary (as defined in
Sec. 217.2 of Regulation Q (12 CFR 217.2)) of a covered BHC, on
January 1, 2018, and thereafter, the supplementary leverage ratio.
* * * * *
(c) * * *
(1) * * *
(iv) Leverage Measure:
(A) The bank has a leverage ratio of 5.0 percent or greater; and
(B) Beginning on January 1, 2018, with respect to any bank that is
a subsidiary of a covered BHC under the definition of ``subsidiary'' in
section 217.2 of Regulation Q (12 CFR 217.2), the bank has a
supplementary leverage ratio of 6.0 percent or greater; and
* * * * *
PART 217--CAPITAL ADEQUACY OF BOARD-REGULATED INSTITUTIONS
0
6. The authority citation for part 217 is revised to read as follows:
Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a,
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904,
3906-3909, 4808, 5365, 5368, 5371.
0
7. Amend Sec. 217.1 by revising paragraph (f)(4) to read as follows:
Sec. 217.1 Purpose, applicability, reservations of authority, and
timing.
* * * * *
(f) * * *
(4) Beginning January 1, 2018, a covered BHC (as defined in Sec.
217.2) is subject to limitations on distributions and discretionary
bonus payments in accordance with the lower of the maximum payout
amount as determined under Sec. 217.11(a)(2)(iii) and the maximum
leverage payout amount as determined under Sec. 217.11(a)(2)(vi).
0
8. In Sec. 217.2 add a definition of ``covered BHC'' in alphabetical
order to read as follows:
Sec. 217.2 Definitions.
* * * * *
Covered BHC means a U.S. top-tier bank holding company that has
more than $700 billion in total assets as reported on the company's
most recent Consolidated Financial Statements for Holding Companies (FR
Y-9C) or more than $10 trillion in assets under custody as reported on
the company's most recent Banking Organization Systemic Risk Report (FR
Y-15).
* * * * *
0
9. In Sec. 217.11
0
A. Add new paragraphs (a)(2)(v) and (a)(2)(vi), and (c);
0
B. Revise paragraph (a)(4); and
0
C. Add Table 2 to read as follows.
Sec. 217.11 Capital conservation buffer and countercyclical capital
buffer amount.
(a) * * *
(2) * * *
(v) Maximum leverage payout ratio. The maximum leverage payout
ratio is the percentage of eligible retained income that a covered BHC
can pay out in the form of distributions and discretionary bonus
payments during the current calendar quarter. The maximum leverage
payout ratio is based on the covered BHC's leverage buffer, calculated
as of the last day of the previous calendar quarter, as set forth in
Table 2 of this section.
(vi) Maximum leverage payout amount. A covered BHC's maximum
leverage payout amount for the current calendar quarter is equal to the
covered BHC's eligible retained income, multiplied by the applicable
maximum leverage payout ratio, as set forth in Table 2 of this section.
* * * * *
(4) Limits on distributions and discretionary bonus payments. (i) A
Board-regulated institution shall not make distributions or
discretionary bonus payments or create an obligation to make such
distributions or payments during the current calendar quarter that, in
the aggregate, exceed the maximum payout amount or, as applicable, the
maximum leverage payout amount.
(ii) A Board-regulated institution that has a capital conservation
buffer that is greater than 2.5 percent plus 100 percent of its
applicable countercyclical capital buffer, in accordance with paragraph
(b) of this section, and, if applicable, that has a leverage buffer
that is greater than 2.0 percent, in accordance with paragraph (c) of
this section, is not subject to a maximum payout amount or maximum
leverage payout amount under this section.
(iii) Negative eligible retained income. Except as provided in
paragraph (a)(4)(iv) of this section, a Board-regulated institution may
not make distributions or discretionary bonus payments during the
current calendar quarter if the Board-regulated institution's:
(A) Eligible retained income is negative; and
(B) Capital conservation buffer was less than 2.5 percent, or, if
applicable, leverage buffer was less than 2.0 percent, as of the end of
the previous calendar quarter.
* * * * *
(c) Leverage buffer--(1) General. A covered BHC is subject to the
lower of the maximum payout amount as determined under paragraph
(a)(2)(iii) of this section and the maximum leverage payout amount as
determined under paragraph (a)(2)(vi) of this section.
(2) Composition of the leverage buffer. The leverage buffer is
composed solely of tier 1 capital.
(3) Calculation of the leverage buffer. (i) A covered BHC's
leverage buffer is equal to the covered BHC's supplementary leverage
ratio minus 3 percent, calculated as of the last day of the previous
calendar quarter based on the covered BHC's most recent Consolidated
Financial Statement for Bank Holding Companies (FR Y-9C).
(ii) Notwithstanding paragraph (c)(3)(i) of this section, if the
covered BHC's supplementary leverage ratio is less than or equal to 3
percent, the covered BHC's leverage buffer is zero.
[[Page 24541]]
Table 2 to Sec. 217.11--Calculation of Maximum Leverage Payout Amount
------------------------------------------------------------------------
Maximum leverage payout ratio (as
Leverage buffer a percentage of eligible retained
income)
------------------------------------------------------------------------
Greater than 2.0 percent............ No payout ratio limitation
applies.
Less than or equal to 2.0 percent, 60 percent.
and greater than 1.5 percent.
Less than or equal to 1.5 percent, 40 percent.
and greater than 1.0 percent.
Less than or equal to 1.0 percent, 20 percent.
and greater than 0.5 percent.
Less than or equal to 0.5 percent... 0 percent.
------------------------------------------------------------------------
Federal Deposit Insurance Corporation
12 CFR Chapter III
Authority and Issuance
For the reasons stated in the preamble, the Federal Deposit
Insurance Corporation is amending part 324 of chapter III of Title 12,
Code of Federal Regulations as follows:
PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS
0
10. The authority section for part 324 continues to read as follows:
Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102-233,
105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242,
105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160,
2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386,
as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828
note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note).
0
11. Revise Sec. 324.403(b)(1)(v) to read as follows:
Sec. 324.403 Capital measures and capital category definitions.
* * * * *
(b) * * *
(1) * * *
(v) Beginning on January 1, 2018 and thereafter, an FDIC-supervised
institution that is a subsidiary of a covered BHC will be deemed to be
well capitalized if the FDIC-supervised institution satisfies
paragraphs (b)(1)(i) through (iv) of this section and has a
supplementary leverage ratio of 6.0 percent or greater. For purposes of
this paragraph, a covered BHC means a U.S. top-tier bank holding
company with more than $700 billion in total assets as reported on the
company's most recent Consolidated Financial Statement for Bank Holding
Companies (FR Y-9C) or more than $10 trillion in assets under custody
as reported on the company's most recent Banking Organization Systemic
Risk Report (FR Y-15); and
* * * * *
Dated: April 8, 2014.
Thomas J. Curry,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, April 10, 2014.
Robert deV. Frierson,
Secretary of the Board.
Dated at Washington, DC, this 8th day of April, 2014.
By order of the Board of Directors.
Robert E. Feldman,
Executive Secretary, Federal Deposit Insurance Corporation.
[FR Doc. 2014-09367 Filed 4-30-14; 8:45 am]
BILLING CODE P